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Article by DailyStocks_admin    (09-02-08 06:44 AM)

Filed with the SEC from Aug 21 to Aug 27:

Sparton (SPA)
Lawndale Capital Management sent a letter to Sparton formally recommending that the company consider adding four independent directors to its board. Lawndale also wants the board to hire experienced turnaround management from outside its "historically ineffective managerial culture." The investor also provided the required notice of its intent, absent a satisfactory settlement of differing viewpoints, to directly nominate candidates for board seats via an alternative proxy slate at the next annual meeting. Lawndale holds 968,810 shares (9.9%).

BUSINESS OVERVIEW

The Company has been in continuous existence since 1900. It was last reorganized in 1919 as an Ohio corporation. The Company’s operations are in one line of business, electronic manufacturing services (EMS). The Company provides design and electronic manufacturing services, which include a complete range of engineering, pre-manufacturing and post-manufacturing services on a contract basis. Capabilities range from product design and development through aftermarket support. All of the facilities are registered to ISO standards, including 9001 or 13485, with most having additional certifications. Products and services include complete “Device Manufacturing” products for Original Equipment Manufacturers, microprocessor-based systems, transducers, printed circuit boards and assemblies, sensors and electromechanical devices for the medical/scientific instrumentation, government, aerospace, and other industries, as well as engineering services relating to these product sales. The Company also designs and manufactures sonobuoys, anti-submarine warfare (ASW) devices, used by the U.S. Navy and other free-world countries. See Note 12 to the Consolidated Financial Statements included in Item 8 of this report for information regarding the Company’s product sales concentration and locations of long-lived assets. The Company’s website address is www.sparton.com. Information provided at the website includes, among other items, the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Quarterly Earnings Releases, News Releases, Governance Guidelines, and the Code of Ethics, as well as various Board of Director committee charters. Upon request, the Company provides, free of charge, copies of its periodic and current reports (e.g., Forms 10-K, 10-Q and 8-K) and amendments to such reports that are filed with the Securities and Exchange Commission (SEC), as well as the Board of Director committee charters. Reports are available as soon as reasonably practicable after such reports are filed with or furnished to the SEC, either at the Company’s website, through a link to the SEC’s site or through the Company’s Shareowner Relations Department.
Electronic Contract Manufacturing Services
Historically, the Company’s principal electronics product was sonobuoys, which are ASW devices used by the U.S. Navy and other free-world military organizations. The Company competes with a very limited number of qualified manufacturers for sonobuoy procurements by the U.S. and select foreign governments. Contracts are obtained through competitive bid or direct procurement. Certain sonobuoy contracts are awarded and produced through a joint venture agreement with UnderSea Sensor Systems, Inc. (USSI), another producer of sonobuoys. USSI’s parent company is Ultra Electronics Holdings PLC, based in the United Kingdom. The joint venture arrangement operates under the name ERAPSCO. ERAPSCO allows the two companies to consolidate their own unique and complementary backgrounds and to jointly develop and produce certain agreed-upon designs for the U.S. Navy and other approved foreign countries. While the joint agreement provides the opportunity to maximize efficiencies in the design and development of the related sonobuoys, both companies function independently; therefore, there is no separate entity to be accounted for or consolidated. With ERAPSCO, individual contract risk exposures are reduced, while simultaneously enhancing the likelihood of achieving U.S. Navy and other ASW objectives. ERAPSCO has been in existence for approximately twenty years. In the past, however, the agreed upon designs included under the joint venture agreement were generally developmental or sonobuoys with low volume demand. Recently, the Company’s ERAPSCO arrangement was expanded to include additional products for U.S. customers and substantially all sonobuoy products for customers outside of the United States.
The Company is now focused on substantially expanding sales in the high-mix, low to medium-volume EMS markets. High-mix describes customers needing multiple product types with generally low to medium volume manufacturing runs. This is where the Company expects substantial future revenue growth, with emphasis on government, aerospace, medical/scientific instrumentation, and industrial markets. Many of the physical and technical attributes in the production of electronics for sonobuoys are the same as those required in the production of other electrical and electromechanical products and assemblies. The Company’s EMS business includes design and/or manufacture of a variety of electronic and electromechanical products and assemblies. Sales are generally obtained on a competitive basis. Competitive factors include technical ability, customer service, product quality, geographic location, timely delivery and price.
Non-sonobuoy electronic contract manufacturing and services are sold primarily through a direct sales force. Design services in the non-sonobuoy area are supported by an engineering organization, with centralized management and decentralized operations, which allows the Company to deliver products and services in an efficient manner and enhances the Company’s focus on new and expanding technologies. In the commercial EMS business, Sparton must compete with a significant number of domestic and foreign manufacturers, some of which are much larger in terms of size and/or financial resources. The Company generally contracts with its customers to manufacture products based on the customer’s design, specifications and shipping schedules. Normally, EMS programs do not require the Company’s direct involvement in original equipment manufacturer product marketing. Material cost and availability, product quality, delivery and reliability are all very important factors in the commercial EMS business.

The Company signed a membership purchase agreement and completed the acquisition of Astro Instrumentation, LLC (“Astro”) on May 31, 2006. Astro was a privately-owned EMS company located in Strongsville, Ohio (near Cleveland) which had been in business for approximately five years. Under the terms of the purchase agreement, the previous owners entered into non-compete agreements with the Company. Astro is an EMS provider that designs and manufactures a variety of specialized medical products, generally involving high-quality medical laboratory and other equipment. The acquisition of Astro furthered the Company’s strategy of identifying, evaluating and purchasing potential acquisition candidates in the defense and medical device markets. The Company believes the acquisition of Astro will favorably position Sparton within the medical market to attract and expand its customer base. The newly acquired entity was merged into Astro Instrumentation, Inc. (Astro) a wholly owned subsidiary of the Company incorporated in the state of Michigan. In January 2007, Astro was renamed Sparton Medical Systems, Inc. (SMS). SMS operates from a 60,000 square foot facility in an industrial park, 20,000 square feet of which was added to the facility during this past fiscal year. Sparton operates the business at its original location and with the prior manufacturing management and staff. The Company intends to continue integrating SMS’s operations and general management oversight with those of the other Sparton locations.
In May 2005, Spartronics, the Company’s Vietnam based subsidiary, began regular production. This facility, located just outside of Ho Chi Minh City, is anticipated to provide growth opportunities for the Company, in current as well as new markets. Spartronics is a full service manufacturing facility, providing an off shore option for customers requesting this type of production facility. Engineering capabilities are in the process of being established.
At June 30, 2007 and 2006, the government funded backlog was approximately $42 million and $41 million, respectively. A majority of the fiscal 2007 backlog is expected to be realized in the next 12-15 months. Commercial EMS sales are not included in the backlog. The Company does not believe the amount of backlog of commercial sales covered by firm purchase orders is a meaningful measure of future sales, as such orders may be rescheduled or cancelled without significant penalty.
Other
One of Sparton’s largest customers is the U.S. Navy. While the loss of U.S. government sonobuoy sales would have a material adverse financial effect on the Company, the loss of any one of several other customers, including Honeywell, Bally, and Siemens Diagnostics, each with sales in excess of 10% of total sales, could also have a significant financial impact. The Company continues to grow its non-sonobuoy EMS sales with the objective of expanding the customer base, thus reducing the Company’s exposure to any single customer. The SMS acquisition will further expand our customer base. While overall sales fluctuate during the year, such fluctuations do not reflect a seasonal pattern or tendency.
Materials for the electronics operations are generally available from a variety of worldwide sources, except for selected components. Access to competitively priced materials is critical to success in the EMS business. In certain markets, the volume purchasing power of the larger competitors creates a cost advantage for them. The Company has encountered in the past (and is beginning to experience again) availability and extended lead time issues on some electronic components due to strong market demand, which resulted in higher prices and late deliveries. However, the Company does not expect to encounter significant long-term problems in obtaining sufficient raw materials. The risk of material obsolescence in the contract EMS business is less than it is in many other markets because raw materials and component parts are generally purchased only upon receipt of a customer’s order. However, excess material resulting from order lead-time is a risk factor due to potential order cancellation or design changes by customers.
Expenditures for research and development (R&D) not funded by customers amounted to approximately $303,000 in fiscal 2007, compared to $882,000 in fiscal 2006, and these expenses are included in selling and administrative expenses. There were no non-funded R&D expenditures in fiscal 2005. Customer funded R&D costs are generally not considered material, are usually part of a larger production agreement, and as such are included in both sales and costs of goods sold. While there are approximately 63 employees involved in R&D activities, none are engaged in this activity on a full time basis.
Sparton employed approximately 1,200 people at June 30, 2007. The Company has one manufacturing division and five wholly-owned active manufacturing subsidiaries.

The industry is extremely competitive and we depend on continued outsourcing by OEMs.
The EMS industry in general is highly fragmented and intensely competitive. The contract manufacturing services provided are available from many sources, and we compete with numerous domestic and foreign EMS firms. Within Sparton’s target market, the high-mix, low to medium-volume sector of the EMS industry, there are substantially fewer competitors, but competition remains strong. Some competitors have substantially greater manufacturing, R&D, marketing, and/or financial resources and in some cases have more geographically diversified international operations. Sparton expects competition to intensify further as more companies enter our target markets and our customers consolidate. In the future, increased competition from large electronic component manufacturers that are selling, or may begin to sell, electronics manufacturing services may occur. Future growth will depend on new outsourcing opportunities, and could be limited by OEMs performing such functions internally or delaying their decision to outsource.
In some cases, Sparton may not be able to offer prices as low as some competitors because those competitors may have lower cost structures for the services they provide, or because such competitors are willing to accept business at lower margins in order to utilize more of their excess capacity. In that event, net sales would decline. At times Sparton may be operating at a cost disadvantage compared to some competitors who have greater direct buying power. As a result, competitors may have a competitive advantage and obtain business from our customers.
Principal competitive factors in our targeted market are believed to be quality, reliability, the ability to meet delivery schedules, technological sophistication, geographic location, and price. During periods of recession in the electronics industry, our competitive advantages in the areas of adaptive manufacturing and responsive customer service may be of reduced importance due to increased price sensitivity. We also expect our competitors to continue to improve the performance of their current products or services, to reduce their current products or service sales prices and to introduce new products or services that may offer greater performance and improved pricing. Any of these could cause a decline in sales, loss of market acceptance of our products or services, profit margin compression, or loss of market share.
Our operating results are subject to general economic conditions and may vary significantly from period to period due to a number of factors.
We are subject to inflation, interest rate changes, availability of capital markets, consumer spending rates, the effects of governmental plans to manage economic conditions and other national and global economic occurrences beyond our control. Such factors, economic weakness, and constrained customer spending have resulted in the past, and may result in the future, in decreased revenue, gross margin, earnings, or growth rates.
We often experience significant fluctuations in our annual and quarterly results of operations. In addition to general economic conditions, other factors that contribute to these fluctuations are Sparton’s effectiveness in managing the manufacturing processes and costs in order to decrease manufacturing expenses, as well as the level of capacity utilization of our manufacturing facilities and associated fixed costs. Sparton’s ASW sales are totally dependent upon access to the U.S. Navy’s test facilities for sonobuoys. Additionally, the Company relies on our customers’ demands, which can and does change dramatically, sometimes with little notice. Such factors also could affect our results of operations in the future.
Start-up costs and inefficiencies related to new or transferred programs can adversely affect our operating results and may not be recoverable.
Start-up costs, the management of labor and equipment resources in connection with new programs and new customer relationships, and the need to estimate required resources, and the timing of those resources, in advance can adversely affect profit margins and operating results. These factors are particularly evident with the introduction of new products and programs. The effects of these start-up costs and inefficiencies can also occur when new facilities are opened, such as our facility near Ho Chi Minh City, Vietnam that opened in fiscal 2005.
If new programs or new customer relationships are terminated or delayed, our operating results may be harmed, particularly in the near term. We may not be able to recoup our start-up costs or quickly replace anticipated new program revenues.
We depend on limited or sole source suppliers for some critical components; the inability to obtain components as required, with favorable purchase terms, could harm our business.
A significant portion of our costs are related to electronic components purchased to produce our products. In some cases, there may be only one supplier of a particular component. Supply shortages for a particular component can delay production, and thus delay shipments to customers and the associated revenue of all products using that component. This could cause the Company to experience a reduction in sales, increased inventory levels and costs, and could adversely affect relationships with existing and prospective customers. In the past, we have secured sufficient allocations of constrained components so that revenue was not materially impacted. If we are unable to procure necessary components under favorable purchase terms, including at favorable prices and with the order lead-times needed for the efficient and profitable operation of our factories, our results of operations could suffer. Currently, several components required in the production of some of the Company’s products are experiencing allocation constraints due to limited supply and the U.S. Government exercising its preemptive rights to these components, which are also used in the manufacture of various military products. Should Sparton be unsuccessful in obtaining the necessary supply of these components to continue in a timely manner the manufacture of some of the Company’s products, operating results for the next fiscal year could be adversely affected.
We are dependent on a few large customers; the loss of such customers or reduction in their demand could substantially harm our business and operating results.
For the fiscal year ended June 30, 2007, our six largest customers, including the U.S. government, accounted for approximately 74% of net sales. U.S. governmental sales, primarily the U.S. Navy, represented 12% of our fiscal 2007 sales. We expect to continue to depend upon a relatively small number of customers, but cannot ensure that present or future large customers will not terminate, significantly change, reduce, or delay their manufacturing arrangements with us. Because our major customers represent such a large part of our business, the loss of any of our major customers or reduced sales to these customers could negatively impact our business. While the continued integration of SMS is anticipated to expand our customer base, currently their customer base is also highly concentrated.
We rely on the continued growth and financial stability of our customers, including our major customers. Adverse changes in the end markets they serve can reduce demand from our customers in those markets and/or make customers in these end markets more price sensitive. Furthermore, mergers or restructurings among our customers or our customers’ customers could increase concentration and/or reduce total demand as the combined entities rationalize their business and consolidate their suppliers. Future developments, particularly in those end markets which account for more significant portions of our revenues, could harm our business and our results of operations.
Future governmental sales could be affected by a decrease in defense spending by the U.S. government, or by changes in spending allocation that could result in one or more of the Company’s programs being reduced, delayed or terminated, which could adversely affect our financial results. The Company’s U.S. governmental sales are funded by the federal budget. Changes in congressional schedules, negotiations for program funding levels or unforeseen world events can interrupt the funding for a program or contract. The timing of sonobuoy sales to the U.S. Navy is dependent upon access to their test facilities and successful passage of their product tests. Reduced governmental budgets have made access to the test range less predictable and less frequent than in the past, which has impacted our reported revenues.
Sparton generates large accounts receivable in connection with electronic contract manufacturing. If one or more of our customers experiences financial difficulty and is unable to pay for the services provided, our operating results and financial condition could be adversely affected.
Customer cancellations, reductions, or delays could adversely affect our operating results.
We generally do not obtain long-term purchase commitments from our customers. Customers may cancel orders, delay the delivery of orders, or release orders for fewer products than we previously anticipated for a variety of reasons, including decreases in demand for their products and services. Such changes by a significant customer, by a group of customers, or by a single customer whose production is material to an individual facility could seriously harm results of operations in that period. In addition, since much of our costs and operating expenses are relatively fixed, a reduction in customer demand would adversely affect our margins and operating income. Although we are always seeking new opportunities, we cannot be assured that we will be able to replace deferred, reduced or cancelled orders.
Our inability to forecast the level of customer orders with much certainty makes it difficult to schedule production and maximize utilization of manufacturing capacity. If actual demand is higher than anticipated, we may be required to increase staffing and other expenses in order to meet such demand of our customers. Alternatively, anticipated orders from our customers may be delayed or fail to materialize, thereby adversely affecting our results of operations. Such customer order fluctuations and deferrals have had a material adverse effect on us in the past, and we may experience such effects in the future.
Such order changes could cause a delay in the repayment to us for inventory expenditures we incurred in preparation for the customer’s orders or, in certain circumstances, require us to return the inventory to our suppliers, re-sell the inventory to another customer or continue to hold the inventory. In some cases excess material resulting from longer order lead-time is a risk due to the potential of order cancellation or design changes by customers. Additionally, dramatic changes in circumstances for a customer could also negatively impact the carrying value of our inventory for that customer.

The Company and its customers may be unable to keep current with technological changes.
The Company’s customers participate in markets that have rapidly changing technology, evolving industry standards, frequent new product introductions, and relatively short product life cycles. The introduction of products embodying new technologies or the emergence of new industry standards can render existing products obsolete or unmarketable. The Company’s success depends upon our customers’ ability to enhance existing products and to develop and introduce new products, on a timely and cost-effective basis, that keep pace with technological developments and emerging industry standards, and address increasingly sophisticated customer requirements. There is no assurance that the Company’s customers will do so and failure to do so could substantially harm the Company’s customers and indirectly the Company.
Additionally, the Company’s future success will depend upon its ability to maintain and enhance its own technological capabilities, develop and market manufacturing services which meet changing customer needs, and successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis. If Sparton is unable to do so, business, financial condition and operating results could be materially adversely affected.
Fluctuations in foreign currency exchange rates could increase operating costs.
A portion of the Company’s operations and some customers are in foreign locations. As a result, transactions may occur in currencies other than the U.S. dollar. Currency exchange rates fluctuate on a daily basis as a result of a number of factors and cannot be easily predicted. Volatility in the functional currencies of our entities and the U.S. dollar could seriously harm our business, operating results and financial condition. The primary impact of currency exchange fluctuations is on the adjustments related to the translation of the Company’s Canadian and Vietnamese financial statements into U.S. dollars, which are included in current earnings, as well as impacting the cash, receivables, and payables of our operating entities. The Company currently does not use financial instruments to hedge foreign currency fluctuation and unexpected expenses could occur from future fluctuations in exchange rates.
Failure to attract and retain key personnel and skilled associates could hurt operations.
Our success depends to a large extent upon the continued services of key management personnel. We cannot be assured that we will retain our key employees, and the loss of service of any of these officers or key management personnel could have a material adverse effect on our business growth and operating results.
Our future success will require an ability to attract and retain qualified employees. Competition for such personnel is intense, and we cannot be assured that we will be successful in attracting and retaining such personnel. Changes in the cost of providing pension and other employee benefits, including changes in health care costs, investment returns on plan assets, and discount rates used to calculate pension and related liabilities, could lead to increased costs in any of our operations.
We are involved in legal proceedings and unfavorable decisions could materially affect us.
Our business activities expose us to risks of litigation with respect to our customers, suppliers, creditors, shareowners, product liability, or environmental-related matters. We may incur significant expense to defend or otherwise address current or future claims. Any litigation, even a claim without merit, could result in substantial costs and diversion of resources, and could have a material adverse effect on our business and results of operations.
Also, in the past, we have filed claims relating to various matters, including product defects discovered in certain aerospace printed circuit boards, which were supplied to us. Although we are pursuing such claims, we cannot predict the outcome. If we are not able to obtain a sufficient recovery, our business and operating results could be adversely impacted. Refer to Item 3 — “Legal Proceedings” of this report.
Adverse regulatory developments could harm our business.
Our business operates in heavily regulated environments. We must manage the risk of changes in or adverse actions under applicable law or in our regulatory authorizations, licenses and permits, governmental security clearances or other legal rights in order to operate our business, manage our work force, or import and export goods and services as needed. We also face the risk of other adverse regulatory actions, compliance costs, or governmental sanctions.
Business disruptions could seriously harm our business and results of operations.
Increased international political instability, evidenced by threats and occurrence of terrorist attacks, conflicts in the Middle East and Asia, and strained international relations arising from these conflicts, may hinder our ability to do business. The political environment in communist countries can contribute to the threat of instability. While we have not been adversely affected as yet due to this exposure, one of our facilities is based in Vietnam, which is a communist country. These events may continue to have an adverse impact on the U.S. and world economies, particularly customer confidence and spending, which in turn could affect our revenue and results of operations. The impact of these events on the volatility of the U.S. and world financial markets could increase the volatility of our securities and may limit the capital resources available to us, our customers and our suppliers.
Our worldwide operations could be subject to natural disasters and other business disruptions, including earthquakes, power shortages, telecommunications failures, water shortages, tsunamis, floods, hurricanes, fires, and other natural or man made disasters, which could seriously harm our financial condition and increase our expenses. In the past, hurricanes have adversely impacted the performance of two of our production facilities located in Florida.
We have a production facility outside Ho Chi Minh City, Vietnam, which is in an area previously affected by avian flu. To the best of our knowledge, concerns about the spread of avian flu have not affected our employees or operations. However, our Asian production could be severely impacted by an epidemic spread of avian flu. These factors could also affect our suppliers and customers, and results of operations.
Changes in the securities laws and regulations have increased, and are likely to continue to increase, our costs.
The Sarbanes-Oxley Act of 2002 that became law in July 2002 required changes in some of our corporate governance, securities disclosure and compliance practices. In response to the requirements of that Act, the Securities and Exchange Commission and the New York Stock Exchange have promulgated new rules on a variety of subjects. Compliance with these new rules, particularly preparation for future compliance with Section 404 of the Sarbanes-Oxley Act regarding management’s assessment of internal control over financial reporting, which is expected to become applicable to Sparton for our fiscal year ending June 30, 2008, has increased our legal, financial, and accounting costs. We expect some level of increased costs related to these new regulations to continue indefinitely. While preparation and consulting costs are anticipated to decline, continuous review and audit costs related to the regulation are expected to increase. The extent of the ongoing and future costs is unknown at this time. However, absent significant changes in related rules (which we cannot assure), we anticipate these costs may decline somewhat in future years as we become more efficient in our compliance processes. We also expect these developments to make it more difficult and more expensive to obtain director and officer liability insurance, and we may be forced to accept reduced coverage or incur substantially higher costs to obtain coverage. Likewise, these developments may make it more difficult for us to attract and retain qualified members of our board of directors or qualified management personnel.
We are subject to a variety of environmental laws, which expose us to potential liability.
Our operations are regulated under a number of federal, state, provincial, local and foreign environmental laws and regulations, which govern, among other things, the discharge of hazardous materials into the air and water, as well as the handling, storage and disposal of such materials. These laws and regulations include the Clean Air Act, the Clean Water Act, the Resource, Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act, as well as analogous state and foreign laws. Compliance with these environmental laws is a significant consideration for us because we use various hazardous materials in our manufacturing processes. We may be liable under environmental laws for the cost of cleaning up properties we own or operate if they are or become contaminated by the release of hazardous materials, regardless of whether we caused the release, even if we fully comply with applicable environmental laws. In the event of contamination or violation of environmental laws, we could be held liable for damages including fines, penalties and the costs of remedial actions and could also be subject to revocation of our discharge permits. Any such penalties or revocations could require us to cease or limit production at one or more of our facilities, thereby harming our business. In addition, such regulations could restrict our ability to expand our facilities or could require us to acquire costly equipment, or to incur other significant expenses to comply with environmental regulations, including expenses associated with the recall of any non-compliant product. See Item 3 — “Legal Proceedings” of this report.
Certain shareowners have significant control and shares eligible for public sale could adversely affect the share price.
As of June 30, 2007, the directors, executive officers and 5% shareowners beneficially owned an aggregate of approximately 56% of our common stock, of which Bradley O. Smith, the Chairman of the Board, beneficially owned or controlled approximately 23%. Accordingly, certain persons have significant influence over the election of our Board of Directors, the approval or disapproval of any other matters requiring shareowner approval, and the affairs and policies of Sparton. Such voting power could also have the effect of deterring or preventing a change in control of the Company that might otherwise be beneficial to other shareowners. In addition, substantially all of the outstanding shares of common stock are freely tradable without restriction or further registration. Sales of substantial amounts of common stock by shareowners, or even the potential for such sales, may cause the market price to decline and could impair the ability to raise capital through the sale of equity securities.

CEO BACKGROUND

David P. Molfenter – Retired since August 2000, formerly Vice President Command, Control, Communication and Information Systems Segment, Raytheon Systems Company, a high technology company specializing in defense electronics, Fort Wayne, Indiana.

W. Peter Slusser – President, Slusser Associates, Inc., Investment Banking, New York, New York.

Bradley O. Smith – Chairman of the Board, Sparton Corporation, Jackson, Michigan, since October 2000. Private Investor since May 1998.

Dr. Lynda J.-S. Yang – Neurosurgeon and faculty member at the University of Michigan School of Medicine, Ann Arbor since 2004. From 1998 to 2004 Dr. Yang was a resident in the neurosurgery department at the University of Michigan. Dr. Yang received an M.D., Ph.D. degree from the Johns Hopkins School of Medicine in 1997.

James N. DeBoer – Of Counsel, law firm of Varnum, Riddering, Schmidt & Howlett, LLP, Grand Rapids, Michigan.

David H. Hockenbrocht – Chief Executive Officer and President of Sparton Corporation, Jackson, Michigan.

James D. Fast – Chief Executive Officer and President of First Bank – West Michigan, Ionia, Michigan.

Douglas R. Schrank – Retired since June 2006. Prior to retirement Mr. Schrank was the Executive Vice President and Chief Financial Officer of Perrigo Company, a multinational pharmaceutical company for a period in excess of five years

Richard L. Langley – Chief Financial Officer, Senior Vice President and Treasurer of Sparton Corporation, Jackson, Michigan.

William I. Noecker – Chairman of Brasco International Inc., an aluminum fabricator, Detroit, Michigan.

MANAGEMENT DISCUSSION FROM LATEST 10K

The following is management’s discussion and analysis of certain significant events affecting the Company’s earnings and financial condition during the periods included in the accompanying financial statements. Additional information regarding the Company can be accessed via Sparton’s website at www.sparton.com. Information provided at the website includes, among other items, the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Quarterly Earnings Releases, News Releases, and the Code of Ethics, as well as various corporate charters. The Company’s operations are in one line of business, electronic manufacturing services (EMS). Sparton’s capabilities range from product design and development through aftermarket support, specializing in total business solutions for government, medical/scientific instrumentation, aerospace and industrial markets. This includes the design, development and/or manufacture of electronic parts and assemblies for both government and commercial customers worldwide. Governmental sales are mainly sonobuoys.
The Private Securities Litigation Reform Act of 1995 reflects Congress’ determination that the disclosure of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements by corporate management. This report on Form 10-K contains forward-looking statements within the scope of the Securities Act of 1933 and the Securities Exchange Act of 1934. The words “expects,” “anticipates,” “believes,” “intends,” “plans,” “will,” “shall,” and similar expressions, and the negatives of such expressions, are intended to identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The Company undertakes no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-K with the Securities and Exchange Commission (SEC). These forward-looking statements are subject to risks and uncertainties, including, without limitation, those discussed below. Accordingly, Sparton’s future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. The Company notes that a variety of factors could cause the actual results and experience to differ materially from anticipated results or other expectations expressed in the Company’s forward-looking statements.
Sparton, as a high-mix, low to medium-volume supplier, provides rapid product turnaround for customers. High-mix describes customers needing multiple product types with generally low volume manufacturing runs. As a contract manufacturer with customers in a variety of markets, the Company has substantially less visibility of end user demand and, therefore, forecasting sales can be problematic. Customers may cancel their orders, change production quantities and/or reschedule production for a number of reasons. Depressed economic conditions may result in customers delaying delivery of product, or the placement of purchase orders for lower volumes than previously anticipated. Unplanned cancellations, reductions, or delays by customers may negatively impact the Company’s results of operations. As many of the Company’s costs and operating expenses are relatively fixed within given ranges of production, a reduction in customer demand can disproportionately affect the Company’s gross margins and operating income. The majority of the Company’s sales have historically come from a limited number of customers. Significant reductions in sales to, or a loss of, one of these customers could materially impact business if the Company were not able to replace those sales with new business.
Other risks and uncertainties that may affect our operations, performance, growth forecasts and business results include, but are not limited to, timing and fluctuations in U.S. and/or world economies, competition in the overall EMS business, availability of production labor and management services under terms acceptable to the Company, Congressional budget outlays for sonobuoy development and production, Congressional legislation, foreign currency exchange rate risk, uncertainties associated with the outcome of litigation, changes in the interpretation of environmental laws and the uncertainties of environmental remediation, and uncertainties related to defects discovered in certain of the Company’s aerospace circuit boards. Further risk factors are the availability and cost of materials. A number of events can impact these risks and uncertainties, including potential escalating utility and other related costs due to natural disasters, as well as political uncertainties such as the conflict in Iraq. The Company has encountered (and is currently beginning to experience again) availability and extended lead time issues on some electronic components in the past when market demand has been unusually strong; this resulted in higher prices and/or late deliveries. Additionally, the timing of sonobuoy sales to the U.S. Navy is dependent upon access to the test range and successful passage of product tests performed by the U.S. Navy. Reduced governmental budgets have made access to the test range less predictable and less frequent than in the past. Finally, the Sarbanes-Oxley Act of 2002 required changes in, and formalization of, some of the Company’s corporate governance and compliance practices. The SEC and New York Stock Exchange (NYSE) also passed rules and regulations requiring additional compliance activities. Compliance with these rules has increased administrative costs, and it is expected that certain of these costs will continue indefinitely. A further discussion of the Company’s risk factors has been included in Part I, Item 1(a), Risk Factors of this report. Management cautions readers not to place undue reliance on forward-looking statements, which are subject to influence by the enumerated risk factors as well as unanticipated future events.

FISCAL 2007 COMPARED TO FISCAL 2006

Sales for the year ended June 30, 2007, totaled $200,086,000, an increase of $29,281,000 (17%) from fiscal 2006. Government sales decreased $12,859,000, primarily due to the impact of design or rework issues on sonobuoy production due to failed sonobuoy drop tests earlier this year. During fiscal 2007, there were approximately $22 million of governmental sales with no or minimal margin. While overall fiscal 2007 sales are below expectation, recent sonobuoy tests have shown improvement. Industrial sales, which includes gaming, decreased slightly primarily due to decreased sales to one customer. Sales in the aerospace market increased 8%, due to activity with two existing customers whose combined sales increased approximately $8 million from last year. Medical/scientific instrumentation sales increased significantly due to the inclusion in fiscal 2007 of a full year of sales from the Company’s newest subsidiary, Sparton Medical Systems, Inc. (SMS). Medical/scientific instrumentation sales of $59,754,000 include $48,380,000 and $3,280,000 of sales in fiscal 2007 and 2006, respectively, contributed by SMS since its acquisition on May 31, 2006.
The majority of the Company’s sales come from a small number of customers. Sales to our six largest customers, including government sales, accounted for approximately 74% and 77% of net sales in fiscal 2007 and 2006, respectively. Bally, an industrial customer, accounted for 12% and 20% of our sales in fiscal 2007 and 2006, respectively. One aerospace customer, Honeywell, with several facilities to which the Company supplies product, provided 18% and 19% of our sales for the years ended June 30, 2007 and 2006, respectively. Siemens Diagnostics (formerly Bayer), a key medical device customer of SMS, contributed 18% of total sales during fiscal 2007.
The following table presents consolidated income statement data as a percentage of net sales for the years ended June 30, 2007 and 2006, respectively.

An operating loss of $12,196,000 was reported for the fiscal year ended June 30, 2007, compared to an operating loss of $1,918,000 for the fiscal year ended June 30, 2006. The gross profit for fiscal 2007 of the newly acquired subsidiary SMS totaled $4,757,000, or 2% of sales. The results of SMS for the one month period ended June 30, 2006, did not have a significant impact on the Company’s fiscal 2006 results. Overall, the gross profit percentage for the year ended June 30, 2007, was 3.0%, a decrease from 8.2% for the same period last year. Gross profit varies from period to period and can be affected by a number of factors, including product mix, production efficiencies, capacity utilization, and new product introduction, all of which impacted fiscal 2007 performance. Reflected in gross profit for the years ended June 30, 2007 and 2006, were charges of $2,740,000 and $1,789,000, respectively, resulting from changes in estimates, primarily related to design and production issues on certain development and production programs. Of these charges, $717,000 and $903,000 were incurred in the fourth quarter of fiscal 2007 and 2006, respectively. The programs are loss contracts and the Company recognized the entire estimated losses, or changes in estimated losses, as of June 30, 2007 and 2006. While some of these programs were completed and shipped by June 30 of this fiscal year, there is a backlog of $2.3 million of sonobuoys with no margin which will be completed and shipped during fiscal 2008. In addition, there are $15.6 million of sonobuoy sales backlog with minimal profit margin expected. Included in the governmental sales of $29,677,000 were approximately $22,013,000 of sales with no or minimal margin. In addition, competitive pricing issues related to one industrial customer reduced margins by approximately $1 million on similar sales in the prior year. The lower margins associated with this customer are expected to continue. Finally, production and program issues related to an aerospace job at one facility resulted in approximately $14,346,000 of sales in fiscal 2007 at essentially no margin. The various issues related to the poor job performance are being addressed with this aerospace customer. The Company anticipates that if it is successful in repricing the product and implementing other measures, that the margin will improve in the future. Included in the gross profit for the years ended June 30, 2007 and 2006, are the losses from the Company’s Vietnam facility of $1.5 million and $1.6 million, respectively. We expect our Vietnamese operating results to improve this next fiscal year.
Gross profit margin in fiscal 2007 was also adversely impacted by increased pension expense. In the fourth quarter of the year, $922,000 of additional pension expense associated with a pro rata settlement adjustment was recorded as a result of lump-sum benefit distributions. This expense was in addition to the normal and anticipated periodic pension expense of $497,000 for fiscal 2007. Pension expense totaled $1,419,000 and $548,000, of which approximately $1,291,000 and $494,000 was included in costs of goods sold, for the fiscal years 2007 and 2006, respectively. A more complete discussion of the settlement adjustment and resulting increased pension expense is included in Note 6 to the Consolidated Financial Statements included in Item 8.
In summary, fiscal 2007 results were very disappointing and substantially below expectations established at the beginning of the fiscal year primarily for the following reasons:
- Approximately $36 million of sales occurred with no or minimal margin. These same sales, assuming a 10% margin, would have generated a margin of $3.6 million or more if executed as expected.

- Gross margins were further reduced by approximately $4 million due to pricing issues on several programs, as well as sonobuoy program cost escalation and changes in estimates.

- Operations and costs of closing the Deming, New Mexico facility reduced our expected gross margin by approximately $1.9 million.

- Losses at our Vietnam facility reduced gross margin by an additional amount of approximately $1.5 million.

- Higher than anticipated pension expense of approximately $1 million further adversely impacted gross margins.
We remain focused on addressing the underlying causes of the above issues. Upon completion of the remaining sonobuoy backlog of approximately $18 million of no or minimal margin contracts and the expansion of the ERAPSO joint venture, the sonobuoy program issues that have adversely impacted our financials are anticipated to be completed. We are reviewing several low or no margin commercial programs either through repricing the programs and/or seeking reimbursement of prior out of scope costs that have occurred. The Vietnam operations have suffered since inception from lower than expected sales. While several new programs should be in startup in Vietnam in fiscal 2008, additional sales are still needed for that plant to reach profitability. Additionally, pension expense in the future is expected to return to more historical levels. Finally, we are continuing to review and address the internal plant performance issues that surfaced in fiscal 2007. Additional resources, training and overview are now in place.
Selling and administrative expenses for fiscal 2007 overall increased primarily due to the inclusion of a full year of costs for SMS, compared to one month of activity in fiscal 2006. The remainder of the increase in selling and administrative expenses primarily relates to minor and expected increases in various categories, such as wages, employee benefits, insurance, and other items. Share-based compensation expense totaled $228,000 and $344,000, of which approximately $198,000 or 87%, and $290,000 or 84% was included in selling and administrative expense for fiscal 2007 and 2006, respectively, with the balance in cost of goods sold. Additional costs were also incurred as a result of compliance activity due to increased SEC and other regulatory requirements. These compliance costs increased in several areas, both internally and externally. Results also include $482,000 and $39,000 for fiscal 2007 and 2006, respectively, of amortization expense related to the purchase of SMS under the purchase accounting rules; for further discussion, see Note 14 to the Consolidated Financial Statements included in Item 8.
Operating income (loss) also includes charges related to the New Mexico environmental remediation effort. Included in EPA related-net of environmental remediation in fiscal 2007 is a one-time $225,000 insurance settlement received in October 2006. EPA charges and income are more fully discussed in Note 10 to the Consolidated Financial Statements included in Item 8. Net gain on sale of property, plant and equipment in fiscal 2007 includes a gain of $190,000 on the sale of undeveloped land in New Mexico. The sale of the Deming, New Mexico facility was completed in July 2007, and its profit will be included in fiscal 2008 results; for further discussion, see note 15 to the Consolidated Financial Statements included in Item 8.

Interest and investment income decreased $916,000 to $201,000 in fiscal 2007. This decrease was due to decreased funds available for investment and a loss from sale of investment securities. Substantially all of the Company’s investment securities portfolio was liquidated during fiscal 2007, primarily to fund the operating losses, additions to property, plant and equipment, repayment of debt, and repurchases of common stock. Investment securities are more fully described in Note 3 to the Consolidated Financial Statements included in Item 8. Interest expense of $1,050,000 (net of capitalized interest of $60,000) and $98,000 in fiscal 2007 and 2006, respectively, is primarily a result of the debt incurred and acquired in the purchase of SMS. A complete discussion of debt is contained in Note 9 to the Consolidated Financial Statements included in Item 8. Other income (expense) – net was $245,000 and $583,000 in fiscal 2007 and 2006, respectively. Other-net in fiscal 2007 and 2006 includes $233,000 and $586,000, respectively, of net translation and transaction gains.
Equity investment income was $425,000 and $21,000 in fiscal 2007 and 2006, respectively. Included in the equity investments is the Company’s investment in Cybernet Systems Corporation (Cybernet), representing a 14% ownership interest.
The Company’s effective tax rate (benefit) for fiscal 2007 was (37%) compared to the statutory U.S. federal tax rate of (34%). A complete discussion of the elements of the income tax provision is contained in Note 7 to the Consolidated Financial Statements included in Item 8.
After provision for applicable income taxes the Company reported a net loss of $7,769,000 ($(0.79) per share, basic and diluted) in fiscal 2007, compared to net income of $98,000 ($0.01 per share, basic and diluted) in fiscal 2006.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS

Sales for the three months ended March 31, 2008, totaled $58,139,000, an increase of $10,413,000 (21.8%) from the same quarter last year. Medical/Scientific Instrumentation sales increased $4,283,000 (or 28.8%) from the same quarter last year. This increase is partially due to new customer programs. In addition, higher demand from three existing customers contributed $3,442,000 of the increase. We anticipate the Medical/Scientific Instrumentation customer base and sales will continue to expand. Aerospace sales were also up $2,793,000 (or 20.8%) from prior year, primarily due to increased sales to one existing customer of $1,069,000. Government sales in fiscal 2008 continue to be significantly above the depressed level of sales in fiscal 2007. This increase in sales of $5,746,000 (or 80.9%), is the result of successful sonobuoy testing. However, Industrial/Other sales declined $2,409,000 (or 19.6%). This decrease was primarily due to lower demand from one customer, which accounted for a decrease of $2,561,000 during the quarter ended March 31, 2008. We are uncertain at this time as to the level of future sales to this customer.

An operating loss of $424,000 was reported for the three months ended March 31, 2008, compared to an operating loss of $3,690,000 for the three months ended March 31, 2007. The gross profit percentage for the three months ended March 31, 2008, was 7.8%, an increase from 1.5% for the same period last year. Gross profit varies from period to period and can be affected by a number of factors, including product mix, production efficiencies, capacity utilization, and costs associated with new program introduction. During the quarter ended March 31, 2008, gross profit was favorably impacted by improved margins on sales to several customers, a result of pricing increases and improved performance. In addition, successful sonobuoy drop tests allowed for significantly improved Government sales, as well as an increased margin associated with those sales. However, these improvements were partially offset by price concessions granted to one industrial customer. Included in the three months ended March 31, 2008 and 2007 were results from the Company’s Vietnam facility, which has adversely impacted gross profit by $216,000 and $520,000, respectively.
Government sonobuoy sales with no or minimal margin for the quarter ended March 31, 2008 were insignificant, compared to $5.6 million for the quarter ended March 31, 2007. With the completion and sale of several contracts in early fiscal 2008, the majority of the backlog of these contracts, which totaled $17.9 million at June 30, 2007, has now been completed. The completion of these contracts is anticipated to allow for improved margins in future quarters. During the quarters ended March 31, 2008 and 2007, there were cost to complete adjustments totaling approximately $110,000 of income and $121,000 of expense, respectively, related to the sonobuoy programs.
The increase in selling and administrative expenses for the three months ended March 31, 2008, compared to the same period in the prior year, was primarily due to increases in various categories, such as wages, employee benefits, insurance, regulatory compliance and other items, many of which increased due to support needed for the large number of job starts under way, and increased sales activity. A portion of the change, approximately $95,000, was due to increased wages, related benefits, and employee activity at one facility related to the support and start up activity of new customers and increased sales within the Medical/Scientific Instrumentation market. Beginning in fiscal 2006, the Company was required to expense the vested portion of the fair value of stock options. For the three months ended March 31, 2008 and 2007, $44,000 (or 85%) and $44,000 (or 81%) of the total $52,000 and $54,000, respectively, was included in selling and administrative expenses, with the balance reflected in costs of goods sold. The majority of the decrease in selling and administrative expenses, as a percentage of sales, was due to the significant increase in sales in the three months ended March 31, 2008. Amortization expense, which totaled $120,000 for the quarters ended March 31, 2008 and 2007, was related to the purchase of SMS under the purchase accounting rules; for a further discussion see Note 4 of the Condensed Consolidated Financial Statements.
Interest and investment income decreased from the prior fiscal year, mainly due to less funds available for investment and lower interest rates. Interest expense of $249,000 and $206,000, net of capitalized interest, for the three months ended March 31, 2008 and 2007, respectively, was primarily the result of the debt incurred and assumed as part of the acquisition of SMS. A further discussion of debt is contained in Note 5 of the Condensed Consolidated Financial Statements.
Other expense-net for the three months ended March 31, 2008 was $284,000, versus $24,000 in fiscal 2007. Translation adjustments, along with gains and losses from foreign currency transactions, in the aggregate, which are included in other income/expense amounted to a loss of $277,000 and $36,000 for the three months ended March 31, 2008 and 2007, respectively.
The effective tax rate utilized to calculate the applicable tax provision (credit) requires management to make certain estimates, judgments, and assumptions. These estimates, judgments, and assumptions are believed to be reasonable based on information available at that time. To the extent these estimates, judgments, and assumptions differ from that which actually occurs during the course of the year, the tax provision (credit) can be, and in the past has been, materially affected. As a result of the change in fiscal 2008’s estimated effective tax rates to the year-to-date period’s 42%, approximately $1,168,000 of tax benefit was recognized in the quarter ended March 31, 2008, that related to the previous six months ended December 31, 2007. Without the impact of this favorable tax benefit from the prior six months, the third quarters before tax loss of $921,000 would have had a tax benefit of only $387,000, resulting in a loss for the quarter ended March 31, 2008, of $534,000. Management believes it is important for the users of these financial statements to understand that without the benefit of the tax effect from prior periods, which is reflected in the third quarter of fiscal 2008’s results, that the three months ended March 31, 2008, would have reflected the before mentioned loss of $534,000 rather that the net income of $634,000 that actually occurred. This change in effective tax rate was due primarily to changes in forecasted taxable income for the current fiscal year. For a further discussion on income taxes see Critical Accounting Policies and Estimates included in this report.
Due to the factors described above, the Company reported net income of $634,000 ($0.06 per share, basic and diluted) for the three months ended March 31, 2008, compared a net loss of $2,294,000 ($0.23 per share, basic and diluted) for the corresponding period last year.

Sales for the nine months ended March 31, 2008 totaled $171,942,000, an increase of $22,843,000 (15.3%) from the same period last year. Medical/Scientific Instrumentation sales also increased $12,221,000 (or 26.7%), above sales for the nine months ended March 31, 2008. Again, this increase is partially due to new customer programs and expanded sales to the existing customer base. A portion of the increase was due to three customers, who combined contributed $10,181,000 to the increase. Medical/Scientific Instrumentation sales are expected to continue to expand. Aerospace sales were up slightly from prior year, primarily due to increased sales to one existing customer of $1,770,000. Government sales in fiscal 2008 continue to increase due to the results of successful sonobuoy drop tests, increasing $18,000,000 (or 92.9%), from the prior year. However, Industrial/Other sales declined $11,120,000 (or 26.6%). This decrease was primarily due to decreased sales to two existing customers, which accounted for a combined decrease of $11,324,000 during the nine months ended March 31, 2008. We are uncertain at this time as to the level of future sales to these two customers. This decrease was partially offset by increased sales to other customers.
The majority of the Company’s sales come from a small number of key strategic and large OEM customers. Sales to the six largest customers, including government sales, accounted for approximately 73% and 72% of net sales for the nine months of fiscal 2008 and 2007, respectively. Five of the customers, including government, were the same both years. During the nine months ended March 31, 2008 and 2007, Bally, an industrial customer, accounted for 6% and 12% of total sales, respectively. Additionally, an aerospace customer, Honeywell, with several facilities to which we supply product, provided 15% and 18% of total sales for the nine months ended March 31, 2008 and 2007, respectively. Siemens Diagnostics (formerly Bayer), a key medical device customer of SMS, contributed 18% and 19% of total sales during the nine months ended March 31, 2008 and 2007, respectively.

An operating loss of $3,946,000 was reported for the nine months ended March 31, 2008, compared to an operating loss of $8,029,000 for the nine months ended March 31, 2007. The gross profit percentage for the nine months ended March 31, 2008, was 5.7%, an increase from 3.3% for the same period last year. Gross profit varies from period to period and can be affected by a number of factors, including product mix, production effi ciencies, capacity utilization, and costs associated with new program introduction, all of which impacted fiscal 2008’s performance. During the nine months ended March 31, 2008, gross profit was favorably impacted by improved margins on several customers, a result of pricing increases and improved performance. In addition, successful sonobuoy drop tests allowed for significantly improved government sales, as well as an increased margin associated with those sales. However, these improvements were partially offset by price concessions granted to one industrial customer, which reduced margins by approximately $674,000 on similar sales in the prior year. Included in the nine months ended March 31, 2008 and 2007 were results from the Company’s Vietnam facility, which has adversely impacted gross profit by $622,000 and $1,205,000, respectively. In addition, we have incurred and expensed approximately $1.3 million in start-up related costs for approximately ten new programs at several facilities.
Also included in costs of goods sold for fiscal 2008 was the write-off of inventory previously carried as a deferred asset. This write-off totaled approximately $1,643,000 and was the result of an adverse legal opinion from the Sixth Circuit Court of Ap peals where Sparton was defending the appeal of a decision of the lower court in Sparton’s favor. The gross profit percentage for fiscal 2008 was reduced by 1.0 percentage point due to this write-off. For a further discussion of this legal claim see Part II, Item 1, Legal Proceedings of this report.
Negatively impacting gross profit in both periods were $19.0 million and $14.9 million of government sonobuoy sales with no or minimal margin for the nine months ended March 31, 2008 and 2007, respectively. With the completion and sale of several contracts in the first and second quarters of fiscal 2008, the majority of the backlog of these contracts, which totaled $17.9 million at June 30, 2007, has been completed. The completion of these contracts is anticipated to allow for improved margins in future quarters. During the nine months ended March 31, 2008, there were minimal cost to complete adjustments (totaling approximately $86,000 of income) related to the sonobuoy programs. This compares to $2.0 million of expense adjustments resulting from changes in estimates for the same period the prior year. As of March 31, 2008, the backlog remaining of government contracts with minimalor breakeven margins was approximately $0.7 million compared to $16.9 million as of March 31, 2007.
Increase in selling and administrative expenses for the nine months ended March 31, 2008, compared to the same period in the prior year, was primarily due to two factors. A significant portion of the change, approximately $610,000, was due to increased wages, related benefits, and employee activity at one facility related to the support and start up activity of new customers and increased sales within the Medical/Scientific Instrumentation market. In addition, approximately $231,000 of higher than normaloutside service costs were incurred for assistance in connection with preparing for compliance with the Company’s obligation to report on internal control over financial reporting, which commences on June 30, 2008. Beginning in fiscal 2006, the Company was required to expense the vested portion of the fair value of stock options. For the nine months ended March 31, 2008 and 2007, $96,000 (or 77%) and $158,000 (or 84%) of the total $125,000 and $188,000, respectively, was included in selling and administrative expenses, with the balance reflected in costs of goods sold. The remaining increase was due to additional increases in various categories, such as wages, employee benefits, insurance, regulatory compliance and other items, many of which increased due to support needed for the large number of job starts under way and increased sales activity. The majority of the decrease in selling and administrative expenses, as a percentage of sales, was due to the significant increase in sales in the nine months ended March 31, 2008. Amortization expense, which totaled $361,000 and $362,000 for the nine months ended March 31, 2008 and 2007, was related to the purchase of SMS under the purchase accounting rules; for a further discussion see Note 4 of the Condensed Consolidated Financial Statements. Net gain on sale of property, plant and equipment resulted from the sale of the property, plant and equipment of the Deming facility located in New Mexico. For a further discussion of this sale see Note 10 of the Condensed Consolidated Financial Statements. Net gain on sale of property, plant and equipment in fiscal 2007 includes a gain of $199,000 on the sale of undeveloped land in New Mexico.
Interest and investment income decreased from the prior fiscal year, mainly due to less funds available for investment and lower interest rates. Interest expense of $849,000 and $794,000, net of capitalized interest, for the nine months ended March 31, 2008 and 2007, respectively, was primarily the result of the debt incurred and assumed as part of the acquisition of SMS. A further discussion of debt is contained in Note 5 of the Condensed Consolidated Financial Statements.
Other income-net for the nine months ended March 31, 2008 was $310,000, versus other expense-net of $284,000 in fiscal 2007. Translation adjustments, along with gains and losses from foreign currency transactions, are included in other income and, in the aggregate, amounted to a gain of $313,000 and a loss $297,000 for the nine months ended March 31, 2008 and 2007, respectively.
The effective tax rate utilized to calculate the applicable tax provision (credit) requires management to make certain estimates, judgments, and assumptions. These estimates, judgments, and assumptions are believed to be reasonable based on information available at that time. To the extent these estimates, judgments, and assumptions differ from that which actually occurs during the course of the year, the tax provision (credit) can be, and in the past has been, materially affected. As of March 31, 2008, fiscal 2008’s estimated effective tax rate was determined to be 42%, compared to 31% as of March 31, 2007.
Due to the factors described above, the Company reported a net loss of $2,652,000 ($0.27 per share, basic and diluted) for the nine months ended March 31, 2008, versus a net loss of $6,135,000 ($0.62 per share, basic and diluted) for the corresponding period last year.

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